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Do oil-market shocks drive global liquidity?

Yao Axel Ehouman

No 2020-33, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: This paper aims to assess the impact of oil shocks on global liquidity evolution over the 1999–2018 period, an issue not already addressed by literature. To this end, we rely on a two-stage approach that allows us to trace fluctuations in the crude oil price to the underlying supply and demand shocks, on the one hand, and to estimate the responses of global liquidity indicators to these shocks on the other hand. Our results support the existence of a link between oil shocks and global liquidity. In particular, we show that global liquidity responses to oil shocks depend on the shocks’ nature. While aggregate and oil-specific demand shocks have, respectively, negative and positive effects on the evolution of global liquidity, oil supply shocks do not significantly affect global liquidity due to their relatively low contribution to oil price changes. Thus, this paper highlights that oil price movements by driving global liquidity dynamics can be identified as a potential source of financial instability.

Keywords: Global liquidity; oil price; oil demand shocks; oil supply shocks; Structural VAR. (search for similar items in EconPapers)
JEL-codes: E51 F00 Q41 Q43 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2020
New Economics Papers: this item is included in nep-ene and nep-mac
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